Not All Rate Cuts Are Created Equal

Thursday, March 22, 2007 | 06:53 AM

Yesterday, the FOMC statement dropped the phrase from the January statement: "the extent and timing of any additional firming that may be needed..."

While many people interpreted this as a shift towards a Neutral Bias, it was more of a half step. Call it "pre-shift language."

As we noted, this change reflects an acknowledgement that the economy is slowing and inflation remains elevated. Looking at the past few months data, it is fairly obvious as to why they made the change: The Economy is visibly cooling. We have seen an increased risk of a sharp economic slowdown, if not a hard landing. As Federal Express made clear, peak cycle earnings are now at risk as activity slows. At the same time, Inflation has not moderated.

There are only two reasons for the FOMC to shift to neutral and prep for rate cuts -- one good, one bad. Yesterday was the bad reason.

Its not that the Fed is suddenly less hawkish because inflation threats have suddenly disappeared. Indeed, the Fed specifically noted that "Recent readings on core inflation have been somewhat elevated." In other words, this shift in posture (if not quite bias) was not motivated by the vanquishing of inflation, it was due to threat of recession.

Dow_fed Traders rallied the Market on the news. They tend to shoot first and ask questions later. I suspect the subtleties  of whether this was a good or a bad reason for a future rate cut may have been lost on them. We don't like to argue with traders, as their attention spans are notoriously short (I say that as someone who began his Wall Street career on a trading desk).

Traders have a tendency to create self-fulfilling prophesies. Yesterday's balance of volume was 90/10, meaning the up/down volume was 9 to 1 to the positive side. This was the 2nd such 90/10 day this month. The last time we saw two 90/10 days w/i a month was back in June of 2006. Buyers then were amply rewarded, as markets tagged on about 20%.

However, there is a significant difference between then and now -- The February 27 whackage was a 90/10 DOWN day. That makes the parallel to June 2006 less than perfect.


For more on the significance on 90/10 days, see our two part discussion with Lowry's Paul Desmond for details.


UPDATE: March 22, 2007 8:06am

Mark Hulbert goes over the bullish implications of a 90/10 day here: Nine to one

In addition to pointing out the significance of having two 90/10 days in close proximity, he also mentions a notable failure: March 16, 2000

"This second 9-to-1 up day adds greatly to the bullish significance of the first, according to Zweig. That's because a single 9-to-1 up day, by itself, has not always been a bullish event. Perhaps its biggest false signal came on March 16, 2000, at more or less the exact top of the market before the Internet bubble burst."

According to Martin Zweig, the originator of the 90/10 day analysis, a "9-to-1 down day in the proximity of two 9-to-1 up days implies "not as much [upward] thrust" as do two 9-to-1 up days that are unaccompanied by a 9-to-1 down day."

As we noted above, that is the primary difference between this set of 90/10 days and the ones experienced in June . . .


Nine to one: A rare and bullish technical event occurred Wednesday
Mark Hulbert
MarketWatch, 5:43 PM ET Mar 21, 2007

Thursday, March 22, 2007 | 06:53 AM | Permalink | Comments (27) | TrackBack (0) add to | digg digg this! | technorati add to technorati | email email this post



TrackBack URL for this entry:

Listed below are links to weblogs that reference Not All Rate Cuts Are Created Equal:


European and Asian markets are following the US rally on the shocking revelation that the Fed won't likely raise interest rates again.

By the June meeting, rate cut odds right now are at 38% up from 26% yesterday prior to the FOMC statement and down from 42% as of the close.

Bonds have been pricing in a rate cut by yr end for a while and has priced in almost 2 for the past month. With inflation trends still remaining elevated, the Fed will be reluctant to cut so soon BUT we all know when push comes to shove, saving the economy with rate cuts is going to be their move. We then have to ask, with long term interest rates at historically low levels and a consumer already highly leveraged, will lower short term rates help?

Posted by: Peter | Mar 22, 2007 7:54:30 AM

The comments to this entry are closed.

Recent Posts

December 2008
Sun Mon Tue Wed Thu Fri Sat
  1 2 3 4 5 6
7 8 9 10 11 12 13
14 15 16 17 18 19 20
21 22 23 24 25 26 27
28 29 30 31      


Complete Archives List



Category Cloud

On the Nightstand

On the Nightstand

 Subscribe in a reader

Get The Big Picture!
Enter your email address:

Read our privacy policy

Essays & Effluvia

The Apprenticed Investor

Apprenticed Investor

About Me

About Me
email me

Favorite Posts

Tools and Feeds

AddThis Social Bookmark Button

Add to Google Reader or Homepage

Subscribe to The Big Picture

Powered by FeedBurner

Add to Technorati Favorites


My Wishlist

Worth Perusing

Worth Perusing

mp3s Spinning

MP3s Spinning

My Photo



Odds & Ends

Site by Moxie Design Studios™